After a moratorium on foreclosures due to the Covid-19 pandemic, foreclosures are now rising. As a result, we can expect to see a boost in the variety of REO residential or commercial properties offered on the market in the coming months.

Whether you're a reasonably new real estate agent or one who's remained in business for a while, you probably might use a refresher on these bank-owned homes.

Our resident REO professional, Jeff Underwood, shares what real estate agents need to understand about REO residential or commercial properties in Alabama.

What is an REO residential or commercial property?

Put simply, an REO residential or commercial property is property that is owned by a bank or lending institution after failing to cost a foreclosure auction. But to truly understand REO residential or commercial properties, you initially need to understand the foreclosure procedure.

The Foreclosure Process

When an individual with a mortgage stops making payments on that mortgage for any reason, the foreclosure procedure will begin. The mortgage agreement will consist of language about when the bank can start this procedure. Typically, a lending institution won't start the foreclosure process till the debtor has missed four consecutive payments.

Not all residential or commercial properties that go into the foreclosure procedure are in fact foreclosed upon. Jeff Underwood, handling attorney at South Oak Title & Closing in Auburn, states, "In lots of cases, the mortgage is reinstated or the loan provider will exercise loss mitigation choices to avoid foreclosure. A debtor who applies for Chapter 13 personal bankruptcy will likewise halt the foreclosure procedure."

This procedure looks different in every state. Underwood discusses, "Alabama is a nonjudicial state. This means that the bank does not have to submit a suit against the defaulted mortgagor to foreclose. Instead, the bank sends a series of notices that informs the mortgagor that they remain in default and offers details about reinstatement. Failure to do so will lead to a foreclosure sale." Other states, such as Florida, need lending institutions to submit a claim versus the mortgagor in state court to foreclose.

In Alabama, notices about the upcoming foreclosure sale are also released in the county newspaper for three weeks. If the bank or lending institution is the high-bidder or only buyer at the foreclosure sale, this residential or commercial property ends up being "realty owned", or an REO residential or commercial property.

Selling an REO residential or commercial property

Jeff Underwood says, "Lenders aren't in the organization of keeping these residential or commercial properties. Their goal is to offer the home and recoup their losses from the foreclosure. After the foreclosure sale, the residential or commercial property will go on the market as an REO residential or commercial property." The lender sends out a recommendation for this residential or commercial property to both a realty brokerage and a title company.

Listing Process for REO residential or commercial properties

Listing an REO residential or commercial property for sale is really comparable to listing any other residential or commercial property, with a couple of essential distinctions. There's still a check in the lawn, a listing on the MLS, and photos of the residential or commercial property. The broker's goal is to find a buyer for the residential or commercial property. But instead of an individual client, the broker represents a lender. On the MLS, this residential or commercial property will be designated as bank-owned.

Underwood states, "These residential or commercial properties may not look like a common home that's market-ready. We had one REO residential or commercial property where the previous owner took everything out of the house, consisting of sinks and banisters. The bank will employ a business to tidy things up and make sure things are working, however purchasers will not discover a staged, upgraded home."

Lenders wish to sell REO residential or commercial properties for reasonable market price as quickly as possible, so rates is figured out by acquiring a BPO, or broker price opinion. Two real estate agents will offer their viewpoint on the market price of the residential or commercial property, and after that these viewpoints are averaged to acquire the market price. If the residential or commercial property suffers on the marketplace, the bank will begin dropping the cost in incremental portions to find a purchaser.

Title Process for REO residential or commercial properties

When the title company receives the recommendation for an REO residential or commercial property, they will start a title search, simply as they would for any other residential or commercial property. "We do this before the residential or commercial property is listed for sale, and similar to any title search and test, we're searching for any potential concerns so that we can provide a clear title to the purchaser," Underwood describes.

If the title is clear, this file is prepared for when the residential or commercial property goes under agreement. If there are concerns that need to be addressed such as judgments, encumbrances, or liens, the title business will clear the title so that it's all set for a future buyer. Once the residential or commercial property goes under agreement, all that's required is an upgrade to title.

Common Title Issues with REO Properties

Several typical title concerns can develop with REO residential or commercial properties. Tax redemption issues are particularly typical. In Alabama, taxes are paid in arrears. If they're not paid by December 31, they undergo charges and interest. If taxes are still unsettled by April, the county will have a tax sale in May. In many cases, the county is the high bidder. But in other cases, a 3rd party will acquire the tax certificate.

Underwood states, "If the county owns the tax certificate, resolving this is a pretty straightforward procedure. But if it's owned by a 3rd party, it can get complicated." To redeem from a private, a bank is needed to pay the overdue taxes, charge, interest, along with the value of any enhancements on the residential or commercial property. In some situations, there can be a prolonged settlement process to eliminate this tax lien.

Encroachment issues are also common with REO residential or commercial properties. Residential or commercial property lines aren't always clearly delineated, which is why studies are a required part of the title search and examination. Underwood explains, "An encroachment is any structure that exists on a next-door neighbor's land or residential or commercial property - a fence, a shed, a mobile home, and even part of a house or barn." It can be complicated to clear these problems and sometimes, a quitclaim deed may be required.

And just like any other residential or commercial property, we can discover any variety of other title issues. Missing deeds, deeds in the back chain of title that lack marital status, and other encumbrances can also be discovered throughout the title search and examination. Title companies experienced with REO residential or commercial properties understand exactly which issues to look for and how to address them to present REO buyers with a clear title.

Owner's title insurance coverage secures property buyers from hidden threats to their title after purchase. A boosted owner's policy may be suggested for people who buy an REO residential or commercial property. But regardless of the policy, REO residential or commercial property buyers ought to constantly understand laws worrying the right of redemption.

Right of Redemption Laws

Individuals, including the foreclosed debtor or beneficiaries of the debtor, can redeem or redeem a foreclosed residential or commercial property for up to a year after the foreclosure sale. Underwood discusses, "To redeem a foreclosed residential or commercial property, the redeeming celebration should pay the amount of the foreclosure bid, interest, and other charges including taxes, insurance, and repair work."

"Because foreclosure sales can take place relatively quickly in Alabama, the redemption duration is longer than in most states. For mortgages originated before 2016, that redemption duration is a year. For mortgages originated after January 1, 2016, the redemption period is shortened to 180 days."

He continues, "Redemptions of foreclosed homes are really rare, but anybody buying an REO residential or commercial property needs to deal with a lawyer who knows and comprehends the law." These laws differ from one state to another and can change, so constantly consult your closing lawyer with particular concerns about the right of redemption.

Buyers buying an REO residential or commercial property before the redemption period expires requirement to be conscious that owner's title insurance will never ever provide affirmative protection over the right of redemption. For cash purchasers, this will be noted as an exception in Schedule B-2 of the owner's title insurance plan for the period of the redemption duration.

Lenders supplying funding for REO purchases will usually need affirmative protection for the staying redemption duration. Options, such as a bond, exist if the loan amount depends on 30% higher than the foreclosure quote, however buyers must comprehend that affirmative coverage for the remaining redemption period just safeguards the lender.

The Future of REO Properties

Due to the pandemic, a moratorium on foreclosures was in location up until November 2021. As this moratorium has lifted, loan providers have actually implemented loss mitigation procedures to keep people in their mortgages and assist them retain their residential or commercial properties. However, if loss mitigation strategies are unsuccessful, the foreclosure procedure starts.

Underwood states, "Foreclosure starts are up 39% over the last quarter, and we're expecting to see a boost in these as the year advances. Starting in the 3rd quarter of this year, we'll start to see a higher-than-normal percentage of REO residential or commercial properties on the marketplace. It won't be like it remained in 2008, but it will certainly be more than what we're used to seeing."

There's no need for real estate agents to be daunted by REO residential or commercial properties. As more of these residential or commercial properties appear in the MLS, real estate agents who comprehend the nuance of purchasing a bank-owned home are much better geared up to serve their customers.

At South Oak Title and Closing, we like partnering with real estate agents to help them better serve their clients. Whether you have specific questions about working with REO residential or commercial properties or just require an REO professional in your corner, we're here for you. Contact us with your concerns today.

Jeff Underwood

Jeff is a Birmingham native and graduate of the Birmingham School of Law. He has invested years dealing with banks, loan providers, and REO residential or commercial properties through his time leading the REO division at a Birmingham law company. Jeff is wed and has two children: one recent graduate and one current student at Auburn University.

Jeff Underwood is the Managing Attorney at South Oak Title & Closing in Auburn.

This post is planned to supply basic information about REO residential or commercial properties in Alabama and should not be considered legal suggestions. Laws worrying REO residential or commercial properties also differ from state to state. Please consult your regional lawyer with questions.